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Home , Leasehold estate, Title insurance

AUG 2006 Leasehold —Sometimes it can be good for you!

Since the introduction of residential in Ontario, the market has grown to encompass commercial as well. Typically used to insure the simple interest of the owner and its lender(s), one overlooked area continues to be that of tenants—especially in regards to ground where signifi cant monies are at risk should the fee owner’s title be put into question or the permitted use under the be prevented. This Newsletter will explain what the Leasehold Title Insurance endorsement (“LTI”) is, when it should be considered and what it covers and does not cover.

Robins, Appleby & Taub LLP 2600 – 120 Adelaide Street West, Toronto, ON M5H 1T1 (416) 868-1080 Darrell Gold LEASING COMMUNIQUÉ Leasehold Title Insurance AUG 2006

LTI Historically ity of the tenant to carry on its business from the premises e.g. a ’s failure to maintain/repair which prevents The LTI Endorsement has been around in the United States the tenant from carrying on its business. Rather, it is de- for close to 30 years but is relatively new to Canada. In Can- signed to cover those risks which are noted in the policy ada, the LTI Endorsement is based on the endorsement and which are NOT otherwise excluded (e.g. an Eviction used by U.S. insurers, known as the Form 13 Leasehold resulting from an expropriation action instituted prior to Endorsement (for tenants) and the corresponding Form the date of the policy which was unknown to the Insured 13.1 one (for leasehold mortgagees). The LTI Endorsement at the Policy Date). merely modifi es/supplements the conditions and stipula- tions of the insurer’s Owner’s Policy such that The losses covered under the LTI Endorsement cannot title defects, , , adverse claims, un-mar- exceed the amount of the policy and losses with respect ketability and lack of access are typically still covered. to those matters excluded from coverage remain excluded and cannot form the basis for coverage under the policy. What Events Are Covered Under An LTI Endorsement? What Losses Are Covered If There Is An “Eviction”: The LTI Endorsement will apply under two types of sce- narios. These are found under the defi nition of “Eviction” The following losses are covered under a sample LTI En- in the LTI Endorsement as follows: dorsement for Stewart Title Guaranty Company:

1. the lawful deprivation in whole or in part of the right 1. the value of the “Remaining Lease Term [this in- of covered by the policy contrary to the cludes any remaining options to extend/renew] of lease itself i.e. the loss of quiet enjoyment of the lands the Leasehold and any Tenant Leasehold Im- due to a prior interest or third party title claim; and provements valued either as a whole or separately… taking into account rent and other for 2. the lawful prevention of the use of the land or the which the tenant will no longer be required to pay for tenant’s improvements for the purposes permitted by the Remaining Lease Term”. the lease in either case as a result of a covered risk e.g. the use—as of the policy date—not being a per- “Tenant Leasehold Improvements” are defi ned in the mitted use under the applicable by-, title LTI Endorsement to include “those improvements, defects such as or restrictive covenants, including landscaping, required or permitted to be lack of legal access etc.. Care should be taken when built on the land by the Lease that have been built drafting the use provisions of the lease to ensure they at the insured’s expense or [underlining added] in are consistent with the coverage provided by the LTI which the insured has an interest greater than the Endorsement. right to possession during the Lease Term”. Typically, the tenant does not own the leasehold improvements As noted earlier, there is a general statement on the LTI it makes—and most ’ lease forms provide Endorsement which provides that the LTI Endorsement is that such improvements immediately belong to the part of the larger policy and subject to all of its terms and landlord upon affi xation [but without the responsibil- provisions and other endorsements, if any. This re-affi rms ity to maintain and repair them] however, the Tenant the importance of never reading and interpreting a clause has the right use during the term. in isolation since other clauses may expand/limit the one in question. 2. Other items covered for loss are as follows:

Title insurance is not designed to protect a tenant from a. reasonable costs of removing and relocating Per- itself i.e. a tenant default resulting in termination by the sonal Property from the lands up to 100 kilome- landlord, nor from landlord default which affects the abil- ters and the reasonable cost of repairing Personal

Robins, Appleby & Taub LLP 2600 – 120 Adelaide Street West, Toronto, ON M5H 1T1 (416) 868-1080 Darrell Gold LEASING COMMUNIQUÉ Leasehold Title Insurance AUG 2006

Property damaged by the removal and relocation; related to tenant default] which could be passed on to the tenant, if the leasehold lender is not cov- b. damages for use and of the land [e.g. ered under its own LTI policy; claim for trespass by true owner] prior to the Evic- tion which the tenant may have to pay to a party j. legal and other professional incurred by the with title paramount to the landlord; tenant with respect to the Eviction but note that the tenant should not take legal action without c. the balance of rent for the lease term [e.g. the insurer approval as it will be the insurer’s right to landlord has good title but the tenant is “Evicted” decide whether or not to defend title; and because it is prevented from carrying on the use]; k. fi nancing costs for the construction of the new d. the fair market value of the tenant’s interest in Tenant Leasehold Improvements unless tenant any sub-lease(s); has been reimbursed by the insurer for the costs e. damages the tenant is obligated to pay to sub- of the original tenant improvements. tenant(s) as a result of the Eviction [i.e. since quiet enjoyment is lost under the head lease, the How Do You Determine The Amount Of subleases are similarly affected]; Coverage To Take-out For Loss Purposes?

f. reasonable costs incurred by the tenant to secure While it is relatively easier to value the “Tenant Leasehold an equivalent replacement ; and Improvements”, valuing the “Remaining Lease Term” pos- es more of a problem. There is no defi nition of “value” so g. if the Tenant Leasehold Improvements have not each case needs to be determined in light of issues unique been substantially completed at the time of the to the location and the tenant. eviction, the actual costs, less salvage value to the date of the Eviction including “costs incurred to Tenant Leasehold Improvements will typically decrease in obtain land use, zoning, building and occupancy value over the term while in many cases the value of the permits, architectural and engineering fees, leasehold estate itself will appreciate—[especially where construction management fees, costs of envi- long term rents have been fi xed in advance as opposed to ronmental testing and reviews and landscaping being tied to market rents]—as market rates rise in rela- costs”. tion to the set lease rent. Where there is a leasehold mort- gage, there will be some basis for determining a minimum Note that the covered items are not expressly leasehold estate value for loan purposes and when added limited to these items. Examples of costs which to the actual costs of the Tenant Leasehold Improvements could arguably be covered and, for the sake of as well as the costs of development of the site incurred by certainty, should be discussed with the insurer at the tenant, will give rise to a closer approximation of at the time of taking out the policy and, then if ac- least the minimum amount the tenant ought to be insur- ceptable, the subject of a further amendment to ing for. the policy, might include the following; The Remaining Lease Term’s value would be determined h. leasing/broker costs for new premises or those as at the date of the Eviction based on the then fair market which might be payable to the broker who ar- value of the lease less the rent remaining to be paid under ranged the fi rst lease but have yet to be paid (e.g. the lease. If rents are lower, then the Leasehold Estate may may be payable at the time of the extension of the have little value and conversely, if rents are higher then the term); value of the Leasehold Estate is greater. If the tenant has i. costs to reimburse the leasehold lender for costs added value to the site through re-zoning, minor variance, it incurred for enforcement of its mortgage [not etc. these could also be taken into account. Cur-

Robins, Appleby & Taub LLP 2600 – 120 Adelaide Street West, Toronto, ON M5H 1T1 (416) 868-1080 Darrell Gold LEASING COMMUNIQUÉ Leasehold Title Insurance AUG 2006

rently there is no standard method for setting the policy an Eviction. amount. In the U.S. there is precedent for rent multipliers There is usually no additional cost for the LTI Endorse- e.g. 6 times annual rent or valuation but these may not al- ment as it is an endorsement to the standard Owner’s ways be reasonably indicative of the value. Policy and essentially modifi es the estate of the owner Note also that options to lease are not covered under the under the policy which is being protected. LTI Endorsement absent amendment. In the case of a It is wise to consider the issue of title insurance and in ground lease with options to lease additional lands, this particular, the LTI Endorsement and discuss the costs and could prove a signifi cant loss to the tenant, especially if all benefi ts with your legal advisors and with the various title of the lands are affected but the tenant has yet to exercise insurers who provide such coverage as there can be differ- the options. ences in the LTI Endorsements used. „ As with all title insurance polices the obligation should still remain on the insurer to defend the insured from a Further Particulars third party claim or resolve the title defect giving rise to The comments contained in this article provide general the Eviction. Compensation for loss should be a last resort information only and should not be relied upon as legal and not the primary choice in most situations. However, advice. Further particulars on the matters summarized the ultimate decision of whether or not to pay/settle a in this report, their implications and suggested courses claim or defend title rests with the Insurer. of action, can be obtained from Darrell M. Gold of our group at (416) 360-3409 or e-mail: When Should You Consider An LTI [email protected]. Endorsement? The author expresses his thanks to Wayne C. Lipton, Whenever you are incurring signifi cant costs [e.g. con- Senior Counsel and Vice-President Commercial Division struction of a building under a ground lease, major capi- and Karen Decker, Senior Counsel and Vice President tal improvements to a building], or where, over time you Underwriting, of Stewart Title Guaranty Company, for could amass signifi cant goodwill by carrying on business their helpful comments. at a particular location, the LTI Endorsement should be se- riously considered and then, if possible and acceptable to the Insurer, further endorsed to cover any costs which you as tenant wish to be clear are covered and payable in the event of an “Eviction”. Of course, if a title matter becomes apparent during the course of your search, it is adviseable to notify the insurer so that it can be underwritten in Schedule B of the policy. Robins, Appleby & Taub LLP provides expertise in all areas of business law including The more due diligence carried out i.e. full title searches commercial real estate, municipal and property to determine and third party rights such tax assessment, banking and insolvency law, tax as easements, restrictive covenants etc. as well as the law and estate planning, commercial litigation entry into appropriate third party agreements such as and corporate law. non-disturbance/priority agreements with prior interest holders, the less exposure to loss. The LTI Endorsement affords protection for the losses covered by it pursuant to

Robins, Appleby & Taub LLP 2600 – 120 Adelaide Street West, Toronto, ON M5H 1T1 (416) 868-1080